Lyxor is the world’s largest hedge fund managed account platform (whether measured by assets of $11 billion or by over 100 managers) and seems to have held that title for an almost monotonous number of years. Lyxor also seems to be monopolizing the awards rankings, with three awards alongside the Leading Managed Account Platform from The Hedge Fund Journal (including HedgeWeek, HFM Week, while readers of Hedge Funds Review also named Lyxor as their favourite managed account platform).
With no shortage of competition from new entrants to the managed accounts space, how does Lyxor stay in pole position?
Striving for innovation
Resting on its laurels is certainly not part of the recipe. A constant striving for innovation characterizes the platform. Already offering a more diverse menu of asset classes, strategies and managers than other platforms, Lyxor did not slow down in 2011. The year saw “unprecedented turmoil in financial markets, with the Arab spring, Fukushima, the Euro crisis and the US downgrade” which provoked “spectacular dispersion performance-wise amongst managers” according to Head of MAP Lionel Paquin. Against this backdrop Lyxor felt an imperative to give investors access to new sources of return and diversification.
The target of 25-30 new managers per year was met, with no fewer than 28 new managers brought on board in 2011. Paquin says Lyxor has “a very broad and comprehensive offering that institutional investors demand to be able to pick the right managers.”
As well as the well known macro, event and long/short equity strategies that do account for the larger part of its assets, the platform has a wide range of relative value offerings: its family of arbitrage strategies includes convertible, volatility, fixed income, and credit arbitrage managers.
The first Lyxor funds run by Brevan Howard and Cheyne went live last year; the first is a systematic CTA and the second is a discretionary event fund. In response to investor demand for more emerging markets exposure, Lyxor identified a handful of funds including regional specialists and those with a global remit. Arx of Brazil, Income Partners from Hong Kong, GAM in London, and Macquarie in Australia now all have investable emerging markets products with Lyxor. The platform has taken a global perspective on hedge funds for some years, with one of its short-term CTAs, Kaiser, coming from Australia.
Perhaps the most impressive new departure in 2011 was the addition of three multi-strategy funds: from quant house AQR, discretionary trading shop Balyasny and Weiss Associates. Multi-strategy products have sometimes presented platforms with greater operational challenges, due to the large number of positions held, the diversity of asset classes traded and the complexity of strategies pursued.
Yet Lyxor was well versed in the relevant mechanics thanks to its existing stable of managers. Lyxor’s deep and seasoned teams were able to devise ways of integrating these strategies into the core processes and routines that apply to all funds on the platform.
Security for investors
The genesis of the Lyxor platform, in 1998, was an investor request for principal protection. The search for security and comfort continues to be the guiding star for many facets of the platform. To start with due diligence, this multi-month process only even begins after funds have passed a demanding pre-screening process.
“Reputational risk is completely out of the question,” says Paquin. A team of nine analysts in London, New York, Tokyo and Paris carry out industry standard background checks as well as taking their own, proprietary, references. Robust risk management along with tried and tested business continuity backups are essential requirements. Funds might fail other tests if they have insufficiently robust operational processes.
Lyxor also has a voracious appetite for data that not all managers are able to satisfy. Less liquid strategies, such as private equity-like ones, are not suited to the generally weekly dealing offered on the platform. The process of assessing liquidity is finely balanced and fluid: while some of the credit funds on the platform might have an allocation to bank loans it is not likely that a pure bank loans strategy would fit well with weekly liquidity. Lyxor has made sound judgements on liquidity and is proud to have met redemption requests in 2008.
After a manager is on-boarded, the assets are segregated from its other funds, ruling out any cross contamination risk. Lyxor has always avoided frauds over its 14-year history. Only counterparties approved by Lyxor can be traded with and the approach is to diversify counterparty exposure to a high degree. Approved names include 10 prime brokers and 15 OTC counterparties: the concept of open architecture means that the platform does not in any way have a conflict of interest with counterparties.
As “counterparty risk reared its head again in 2011, MF Global was not one of the approved counterparties,” says Paquin. Lyxor has also not been exposed to cash management losses arising from money market funds ‘breaking the buck’ or from cash management specialists incurring losses.
Three independent administrators (Globe Op, IFS, SGSS) have responsibility for pricing funds. If three way, or tripartite, reconciliation amongst prime brokers, managers and administrators is deemed a de rigueur operational routine nowadays, Lyxor goes one step further with another layer of cross checking: Lyxor’s own valuation teams of 17 specialists seek to verify and validate prices and valuations received from the other parties. Their special expertise in valuing OTC derivatives was discussed last year in a Hedge Fund Journal review of an Edhec Risk conference. Separate teams also monitor more qualitative compliance questions such as whether a fund is sticking to its stated investment strategy, in accordance with the Investment Management Agreements that Lyxor draw up with each manager.
Technology helps transparency
A fifth level of checks (and much other analysis) can be carried out by investors, if they so desire. Transparency is another hallmark of the platform and one where its domination of technology helps to provide the edge. Risk aggregation has become more fashionable since 2008 but Lyxor have been doing it since 1998. Rather than relying on third party vendors, the platform has developed its own ways to measure risk and leverage on a common basis across all the managers. A team of more than 20 risk analysts lie behind the Panorama Risk Engine that, as the name implies, offers a panoramic view of portfolio risk.
This allows investors to log in and see a homo-geneous picture of risks present in all their Lyxor holdings. A ‘heat map’ will highlight concentrations of asset class, currency or country exposure, for instance, using inputs harmonized across all funds. It also allows for stress tests and sensitivity tests to be applied to a whole portfolio of Lyxor funds, gauging the impact of higher interest rates, for example.
This is an area where Lyxor will be enhancing the ability of investors to carry out their own ‘what if’ exercises. There is substantial scope for customizing reports to investor preferences. Much of the information can also be downloaded and merged into investors’ own risk and reporting systems. Many investors, says Paquin, have acquired an “immediate addiction” to this extremely powerful analytical tool and investors can also get plenty of other updates such as recordings of conference calls held between the Lyxor team and the managers.
Lyxor received a gross $3 billion of inflows last year. If funds of funds once lay behind much of the historical growth of Lyxor, now pension funds are more important, mirroring the shifting provenance of hedge fund inflows in general since 2008. While minimum tickets on the platform are almost invariably lower than for offshore funds, Lyxor has lately signed ground breaking partnerships with two of the world’s top 10 pension funds: the California Teachers scheme in the US and the PGGM health workers fund from the Netherlands.
CALSTRS are retaining Lyxor to advise specifically on macro strategies, while PGGM have asked Lyxor to run a dedicated platform for them. Insurance companies are also being courted with analytical packages allowing them to measure how a fund might impact an insurance company’s Solvency Capital Requirements under Solvency II. These larger investors will sometimes ask Lyxor to build dedicated managed accounts for them, rather than going for the commingled platform.
Trends affecting inflows
Two major trends have been identified over the last 12 months by Lyxor as making the biggest impact on inflows for alternatives. First, since 2000 the ‘equity cult’ has started to be seriously challenged as the ‘lost decade’ left the asset class with barely positive returns. Second, on the fixed income side, given historically very low levels of interest rates, it seems reasonable to think that most of the fall in bond yields has already been seen. Clearly this limits potential for further appreciation in fixed income assets, and raises the spectre of losses if interest rates return towards more normal historical levels.
Additionally, investors have been recently been reminded of the risks associated with investing in sovereign debt. Consequently, Lyxor expects investors worldwide will continue to turn their attention toward alternatives: “looking for a higher return than equities or bonds with a limited correlation to traditional asset classes,” says Paquin.
Going forward into 2012 Lyxor are expecting substantial inflows to continue, citing a Prequin survey showing investors are keen to find decorrelated strategies. Paquin also insists that “size and experience” are increasingly sought after. While he acknowledges that the macro environment is very uncertain, he still insists that there will always be good investment opportunities if investors can access a wide enough range of strategies.
One example he gives is that if monetary policy remains accommodating, the climate should stay conducive to fixed income arbitrage. In volatile markets, the ability to seamlessly switch between funds can be advantageous and nearly all Lyxor funds allow for simultaneous switches – without having to wait for settlement of redemption proceeds.
“It is very easy to implement top down and tactical asset allocation views,” says Paquin. Lyxor’s fund of funds investors have been adept at taking advantage of weekly dealing to swiftly change their positioning, something that helped many of them to limit 2008 losses to single digits.
“An ambitious on-boarding programme lies ahead,” promises Paquin. The new Lyxor Dimension platform has been selective in choosing only those where UCITS rules (for instance on position concentration) will not dilute return potential. Funds accepted so far include a statistical arbitrage offering from Old Mutual and a CTA from IKOS. At Lyxor, more fund launches can be expected of both managed accounts and UCITS in 2012.
Lyxor investors can also look forward to amusing themselves with more sophisticated analytical tools for slicing and dicing their portfolio exposures on the web interface, which will be unveiling fresh techniques this year. Paquin already has his eye on next year’s awards rankings and is working hard to add to his collection of trophies.